Bausch Health Companies (BHC) initially rallied after its Aug. 7 earnings report. The stock’s positive momentum has since fizzled. Traders looking to bet on short-term BHC losses may want to consider doing so via the stock’s put options, says Elizabeth Harrow Tuesday.

In fact, just three trading days after its second-quarter release, BHC was trading back below its pre-earnings close -- and now, the shares have sent up a reliable sell signal, according to Schaeffer’s Senior Quantitative Analyst Rocky White.

Specifically, BHC is trading less than one standard deviation from its 40-day moving average after having spent the majority of its time below this trendline (defined as 60% of the time over the past two months, and eight of the last 10 trading sessions).

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Previous tests of BHC's 40-day as resistance haven’t played out too well for the stock over the past three years, with 10 prior occurrences to examine as our sample.

The five-day returns following these signals are fairly unremarkable; BHC is positive 60% of the time, with the average return arriving at a loss of 0.20%. However, 21 days after a 40-day test, BHC is higher only 20% of the time, with the average return widening to a loss of 13.51%. Based on the equity's current price of $22.42, another drop of this magnitude would place the shares around $19.39 by this time next month.

An aggressive campaign by the shorts could also push BHC lower. Following a lengthy bout of short covering that left short interest on Bausch Health (formerly known as Valeant) at its lowest point in more than two years by the July 1 reporting period, these bearish bettors have begun to re-enter the picture.

Short interest rose by nearly 13% in the most recent reporting period, and a continued resurgence by the shorts could exacerbate BHC’s latest retreat from its historically challenging 40-day moving average.

Downgrades are also a possibility for the struggling pharma stock. Among the 13 brokerage firms tracking BHC, six call it a Strong Buy along with four as Hold and just three as Strong Sell.  Any negative notes from this group could spark fresh selling pressure for Bausch.

Traders looking to bet on short-term losses for BHC may want to consider doing so via the stock's put options. Schaeffer’s Volatility Scorecard (SVS) for the security stands at a steep 99 (out of a possible 100), which means the shares have regularly exceeded the volatility expectations priced into BHC options over the past year.

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